If the interest-free loan money is invested and income is generated on it, then the clubbing rule will not apply on it. The income generated by investing the gifted money is subject to the clubbing rule, due to which this income is added to the income of the person giving the gift.
Many income tax rules allow taxpayers to save tax. There are some conditions attached to every rule. Taxpayers can also save tax by giving gifts to their close relatives. But, there is a catch in this. Gifts are generally not taxed. But, if the gift money is invested and income is generated from it, then the clubbing rule applies on it. This is explained in Section 64 of the Income Tax Act. Let us know about this in detail.
What is said in Section 64?
Section 64 states that if the money received as a gift is invested, then the income generated from it will be added to the income of the person giving the gift. This means that the tax liability of the person giving the gift will increase. This can be easily understood with the help of an example. Suppose Avinash gives his wife Rs 6,00,000 as a gift. His wife fixes this money in a bank FD. She gets an interest of Rs 5,000 on this. This money will be added to Avinash’s income. The reason for this is the rule of section 64, which states that the income generated by investing the gift money will be added to the income of the person giving the gift. This is called clubbing.
What is the way to avoid tax on income from gifts?
The question is what is the solution to this? Its solution is easy. Instead of giving money to his wife as a gift, Avinash will have to give her an interest-free loan. If Avinash gives an interest-free loan to his wife, then the income generated by investing this money will be considered as his wife’s income. His wife will have to show this in her income. The advantage of this will be that there will be no need to club this income with her husband’s income. Due to this, Avinash will not have to pay tax on it.
This thing also needs to be kept in mind
However, it is necessary to understand that giving a tax-free loan to the wife instead of a gift is beneficial only when the wife’s income is not taxable. If the wife falls in a higher tax slab, then she may have to pay a lot of tax on the interest earned from FD. If the wife is a homemaker and has no income, then she will not have to pay any tax on it.
